Dealing with small business and startup debt
Debt is a friend of the startups and small business owners. You can never escape it.
Nobody loves to be in debt. It simply takes away your peace of mind and financial freedom. Startup or the small business debt is something almost every rising entrepreneur faces. But how do they get into debts?
Starting a business takes money. Don’t believe anyone who tells you, they can teach you to start a business with no money. There is something called “startup cost or expenses”; it is not free. It is the cost of starting a business. To grow that business you started, you would also need what’s called “monthly expenditure”; it is neither at no fee. This is also a cost you budget for when planning to start a business, started a business or sustain your business. So you see, starting and growing a business requires funding. Now, you fairly know starting and building a business is not free?
Where do startups get their funding if it’s not for free?
I remember noting in a previous article that, nobody go to the market without money and return with food stuff or groceries. You go to the market with good enough cash(budget). You buy the things you need (business need eg equipments, rent, etc). Perhaps, you may make a list to avoid impulse buying.(buying out of the list)
Same with startup entrepreneurs. They save up for the expenses and make a list of the things they need for their startup business. There are so many ways startups raise money for their businesses.
Here’s a few ways they raise their capital:
a. Personal funding
b. Family and friends
f. Venture capital
So here’s the reality; raising capital for a business is not a child’s play. You need proper financial planning or management skills. From the word go, your financial management or planning must be structured. The failure of this healthy financial practices lead startups straight into debts without a curve. Yes, they have ways of raising the funding but how do they manage it? Most times, it’s even a hurdle to raise capital for business and growth expenditures.
What does DEBT really mean?
An amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements. These different forms all imply intent to pay back an amount owed by a specific date, which is set forth in the repayment term.
Why do startups get into debts?
Briefly, here’s why startup entrepreneurs get into debts.
Unplanned expenditure is simply spending on things not within your plans. Looking at the scenario from the introduction of this very article, I noted that there is something called startup expenditure and as well as monthly expenditures which need to be planned for just like the list you make for your groceries for the market. Spending on things out of the planned list is unplanned expenditure. Allocating funds for things not initially planned for
As long as there is an extra money going out for things not planned for, you would eventually end up borrowing extra for things you would actually be in dying need of. It is true somewhat that, startups get a bit scattered around about their actual need because they may feel at a point in time, something could be of importance which may not be in the expenditure cost. But as a startup entrepreneur, it’s very necessary to learn to adjust within planned expenditures. Make use of the listed expenditures and avoid having to need extra cash which you may not have and end up borrowing; the end result would obviously be debt not profit.
More cash out, less cash in
When you make less or no money(profit) but you keep spending, you end up in debt. The question is; where from the extra cash or income for expenses if less comes in(less income) than goes out?
You either borrow or use up personal funds. Personal funds for your business is borrowed money; in accounting, that’s how it’s recorded, so you treat it as such. It’s a personal loan to your business. It is important to have more cash coming in than being spent in order to avoid debt.
Sometimes, startups feel the need for extra cash for things they think they actually can’t do without. How do you know when you borrow unnecessarily?
When you borrow to solve a situation you can manage or adjust until you have made a little more cash (income) to solve is simply unreasonable. Again, one can argue that, the situation may have the need to get some funding for. Learn that, you only borrow when the outcome of the “borrowing” would yield a 100% and more result (profit).
Don’t borrow, if you can manage or adjust.
Having looked at a few reasons why startups end up in debt, let’s see how we can deal with managing those debts or avoiding them.